CARE: Credit Abuse Resistance Education

Plastic 101: Credit and Debit Cards

Credit and Debit Cards: What’s the deal?

Credit and debit cards. Each lets you pay for products and services. So what’s the difference?

When you buy something with a credit card [1], you are borrowing money from the credit card company. The credit card company will send you a bill every month for the money you borrowed to buy things.

When you use a debit card [2], you are using money in your checking account to buy things.

The Difference, Explained

But there’s more to it than that. For example, with credit cards:

You apply for a credit card at a bank or store

You get a bill once a month for everything you buy with a credit card

You might pay extra money in interest if you don’t pay all of your credit card bill every month

You can use a credit card as a safer way to pay for things online

You can build a credit history [3] using a credit card if you pay the whole bill every month when it is due

What about unauthorized use? Your liability tops out at $50. However, if you report the loss before someone can use your credit card, you are not responsible for any charges you didn’t authorize. If your credit card number is stolen, but not the card, you are not liable for unauthorized use.

With debit cards:

You can get a debit card from the bank when you open a checking account

Money comes out of your checking account when you pay with a debit card

You don’t pay extra money in interest when you pay with a debit card

You can use a debit card at an ATM to get money from your checking account

You do not build a credit history using a debit card

What about unauthorized use? If you report a debit card missing before someone uses it, you are not responsible for any unauthorized transactions. If someone uses your debit card before you report it lost or stolen, your liability depends on how quickly you report it:

Before any unauthorized charges are made: $0

Within 2 business days after you learn of the loss or theft: $50

More than 2 business days after you learn of the loss or theft, but less than 60 calendar days after your statement is sent to you: $500

More than 60 calendar days after your statement is sent to you: All of the money taken from your debit card account, and possibly more; for example, money in accounts linked to your debit account.

If someone uses your debit card number for unauthorized transactions, but your card is not lost, you are not liable for those transactions if you report them within 60 days of your statement being sent to you.

Comparison Shopping: What to Look for

Whether you want a credit or debit card, it’s important to shop around to compare services and fees.

For credit cards, search the following fees:

What is the annual fee? This is what you pay to use the card for a year.

What is the annual percentage rate (APR)? This is how much interest you pay every year. A lower APR means you pay less interest. That costs you less money.

Are there other fees? How much will it cost if a payment was late? What will it cost if you go over your credit limit?

What is the grace period? This is the time between when you spend money and when the card charges you interest. A longer grace period is better. Look for one that is at least 25 days long.

For a debit card, find out what the fee is if you:

have a checking account

use a debit card

get cash from ATMs at other banks

have less money in your account than the bank requires

spend more money than you have in your account

Some banks and credit unions might let you sign up for “overdraft protection.” That means you can use your debit card even when you do not have enough money to pay for the things you are buying. But you might have to pay a fee to the bank. Some banks might charge this fee for every purchase until you put enough money in your account to pay for the things you are buying.

Want to learn more? Visit the Federal Trade Commission [4}  for free articles and videos in English and Spanish. And for materials from our plain-language initiative, check out [5].

About the Author

Colleen Tressler is a Senior Project Manager at the Federal Trade Commission (FTC). She has taken an especially active role in helping to educate consumers about issues that affect their financial well-being. She is responsible for planning, developing, and implementing creative, practical, plain-language, mission-related campaigns. She is a board member for CARE and the Jump$tart Coalition for Personal Financial Literacy.




[3] (PDF) Building a Better Credit Report

[4] Federal Trade Commission Website


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